WellSpan Health Years Ended June 30, 2016 and 2015 With Report of Independent Auditors

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1 C ONSOLIDATED F INANCIAL S TATEMENTS AND S UPPLEMENTARY I NFORMATION WellSpan Health Years Ended June 30, 2016 and 2015 With Report of Independent Auditors Ernst & Young LLP

2 Consolidated Financial Statements and Supplementary Information Years Ended June 30, 2016 and 2015 Contents Report of Independent Auditors...1 Audited Consolidated Financial Statements Consolidated Balance Sheets...3 Consolidated Statements of Operations...5 Consolidated Statements of Changes in Net Assets...6 Consolidated Statements of Cash Flows...7 Notes to Consolidated Financial Statements...9 Supplementary Information (2016 Only) Consolidating Balance Sheet...82 Consolidating Statement of Operations...84 Consolidating Statement of Changes in Net Assets...85 Combining Balance Sheet York, Gettysburg and Ephrata Community Hospital (Obligated Group)...86 Combining Statement of Operations York, Gettysburg and Ephrata Community Hospital (Obligated Group)

3 Ernst & Young LLP One Commerce Square Suite Market Street Philadelphia, PA Tel: Fax: ey.com Report of Independent Auditors The Board of Directors WellSpan Health We have audited the accompanying consolidated financial statements of WellSpan Health, which comprise the consolidated balance sheets as of June 30, 2016 and 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion A member firm of Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the WellSpan Health as of June 30, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating and combined details appearing in conjunction with the consolidated financial statements are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. October 14, 2016 ey A member firm of Ernst & Young Global Limited

5 Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents 110,419 June $ $ 157,203 Assets limited as to use 5,795 4,278 Patient accounts receivable, net of allowance for uncollectible accounts of $65,250 and $37,298 in 2016 and 2015, respectively 272, ,543 Other receivables 20,824 17,122 Inventories 21,928 17,437 Prepaid expenses 27,787 19,176 Total current assets 459, ,759 Investments limited as to use: Board designated 945, ,270 Self-insurance trust 13,032 11,949 Temporarily restricted investments 8,942 9,271 Permanently restricted investments 5,936 4,048 Beneficial interest in perpetual trusts 17,837 17,862 Total investments limited as to use (fair value was $991,765 and $985,086 in 2016 and 2015, respectively) 991, ,400 Pledges receivable, net 5,853 3,109 Property and equipment, net 752, ,229 Investments in joint ventures 10,157 2,985 Notes receivable 2,522 Deferred financing costs, net 3,011 3,109 Other assets 50,965 33,022 Total assets $ 2,275,246 $ 2,005,

6 Liabilities and net assets Current liabilities: Current portion of capital lease obligations 2,171 June $ $ 3,857 Current portion of long-term debt 8,131 7,252 Accounts payable and accrued expenses 67,706 40,015 Accrued interest payable 1,936 1,921 Accrued salaries and wages 127,341 97,578 Advances from third-party payors 4,877 4,967 Professional and general liability reserves and postretirement benefits 28,965 19,759 Third-party payor settlements 16,177 11,460 Total current liabilities 257, ,809 Professional and general liability reserves 74,313 52,848 Capital lease obligations, less current portion 1,002 2,404 Long-term debt, less current portion 548, ,738 Accrued retirement benefits 266, ,083 Interest rate swap agreements 70,126 49,557 Other non-current liabilities 1,511 1,511 Total liabilities 1,218,732 1,056,950 Net assets: Unrestricted 1,005, ,083 Temporarily restricted 23,195 17,496 Permanently restricted 23,093 21,869 WellSpan Health net assets 1,051, ,448 Non-controlling interest 5,000 5,215 Total net assets 1,056, ,663 Total liabilities and net assets $ 2,275,246 $ 2,005,613 See accompanying notes

7 Consolidated Statements of Operations Year Ended June Unrestricted revenues, gains, and other support Net patient service revenue $ 1,965,017 $ 1,623,561 Provision for uncollectible accounts (77,295) (66,902) Net patient service revenue less provision for uncollectible accounts 1,887,722 1,556,659 Other revenue 75,260 67,940 Net assets released from restrictions used for operations 3,001 2,357 Total revenues, gains, and other support 1,965,983 1,626,956 Expenses Salaries and wages 883, ,167 Employee benefits 292, ,114 Professional fees 30,365 23,629 Supplies and other 578, ,029 Depreciation and amortization 84,573 70,931 Interest 18,795 22,105 Loss on debt refinancing ,046 Total operating expenses 1,889,452 1,521,021 Operating income 76, ,935 Other income Contributions 1,509 1,758 Investment income, net (23,082) 10,256 Equity gain of joint ventures Gain (loss) on sale of assets/other 13,837 (526) Contributions received in the acquisitions 58,358 Other expense, net 2,925 (2,200) Change in fair value of interest rate swap agreements (20,569) (5,777) Total other income 33,946 4,358 Excess of revenues over expenses before non-controlling interest 110, ,293 Non-controlling interest (702) (822) Excess of revenues over expenses 109, ,471 Other changes in unrestricted net assets: Change in unrealized gains (losses) on assets limited as to use and investments other-than-trading securities 375 (133) Net assets released from restrictions for purchase of property and equipment 1, Other change in accrued retirement benefits (10,593) (86,777) Increase in unrestricted net assets $ 101,143 $ 23,438 See accompanying notes

8 Consolidated Statements of Changes in Net Assets Year Ended June Unrestricted net assets Excess of revenues over expenses $ 109,775 $ 109,471 Other changes in unrestricted net assets: Change in unrealized (losses) gains on assets limited as to use and investments other-than-trading securities 375 (133) Net assets released from restrictions for purchase of property and equipment 1, Other change in accrued retirement benefits (10,593) (86,777) Increase in unrestricted net assets 101,143 23,438 Temporarily restricted net assets Net realized and unrealized gains on restricted investments (124) 115 Net investment income Contribution received in the acquisition 6,888 Contributions 3,243 4,191 Net assets released from restrictions (4,587) (3,234) Increase in temporarily restricted net assets 5,699 1,239 Permanently restricted net assets Net investment income 850 1,151 Contribution received in the acquisition 1,284 Net realized and unrealized gains on investments (836) (820) Contributions Net assets released from restrictions (603) (647) Increase (decrease) in permanently restricted net assets 1,224 (260) Increase in net assets 108,066 24,417 Net assets Beginning of year 943, ,031 End of year $ 1,051,514 $ 943,448 See accompanying notes

9 Consolidated Statements of Cash Flows Year Ended June Operating activities Increase in net assets $ 108,066 $ 24,417 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Contribution received in the acquisition (66,530) (Gain) loss on disposal of fixed assets (13,837) 526 Non-controlling interest in earnings of consolidated entities, net of distributions (215) 2 Depreciation and amortization 84,573 70,931 Net realized and unrealized gain on assets limited as to use and investments 41,641 (50,252) Change in fair value of interest rate swap agreements 20,569 5,777 Amortization of original issue discount (550) 279 Undistributed loss of investments in joint ventures Change in beneficial interest in perpetual trusts Provision for bad debts 77,295 66,902 Loss of extinguishment of debt ,046 Temporarily restricted net contributions and investment income received (2,301) 3,234 Change in cash due to changes in assets and liabilities: Patient accounts receivable and other receivables (99,098) (95,830) Inventories, pledges receivable, prepaid expenses, and other assets (3,184) 7,844 Accounts payable and accrued expenses and accrued interest payable (5,803) (984) Accrued salaries and wages 17,326 6,599 Advances from third-party payors (136) (577) Estimated third-party payor settlements 1, Estimated self-insurance costs 24,327 (347) Accrued retirement benefits 10,242 19,997 Net cash provided by operating activities before change 195,335 78,699 (Increase) decrease in investments designated as trading securities, net (15,665) 13,822 Net cash provided by operating activities 179,670 92,

10 Consolidated Statements of Cash Flows (continued) Year Ended June Investing activities Capital expenditures $ (160,486) $ (70,259) Proceeds on sale of property and equipment 17, Cash received in the acquisitions 2,885 Increase in assets limited as to use and investments designated as other than trading securities (6,552) (66,655) Change in investments in joint ventures (1,253) (90) Net cash used in investing activities (148,284) (136,240) Financing activities Temporarily restricted net contributions and investment income received 2,301 (3,234) Principal repayments on long-term debt and notes payable (81,298) (180,372) Proceeds from issuance of notes payable and long-term debt 1, ,929 Deferred financing cost, net of refunds (1,012) (19,478) Net cash provided by financing activities (78,170) 72,845 Increase in cash and cash equivalents (46,784) 29,126 Cash and cash equivalents, beginning of year 157, ,077 Cash and cash equivalents, end of year $ 110,419 $ 157,203 Supplemental cash flow information Cash paid for interest, net of capitalized interest $ 18,780 $ 21,794 Cash paid for income taxes $ 239 $ 630 See accompanying notes

11 Notes to Consolidated Financial Statements June 30, Organization WellSpan Health (WSH) is a not-for-profit corporation and has the following sole-member corporations, equity investments, and other affiliates as of June 30, 2016: Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Consolidated Hospitals Ephrata Community Hospital (ECH) Sole member May 1940 A not-for-profit corporation that operates a hospital. Gettysburg Hospital (GH) Sole member March 1919 A not-for-profit corporation that operates a hospital. Good Samaritan Hospital (GSH) Sole member November 1891 A not-for-profit corporation that operates a hospital. This entity was acquired effective of July 1, WellSpan Philhaven (WPH) Sole member May 1949 A not-for profit corporation that operates a psychiatric mental health hospital. This entity was acquired effective of January 1, WellSpan Specialty Services (WSS) Sole member April 1997 A not-for-profit corporation that operates a hospital and other operations. York Hospital (YH) Sole member January 1880 A not-for-profit corporation that operates a hospital

12 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Consolidated Foundations Ephrata Community Health Foundation (ECHF) ECH is the sole member of ECHF June 2013 A not-for-profit foundation formed to raise funds to further support the operations of ECH. Gettysburg Hospital Foundation (GHF) GH is the sole member of GHF July 1983 A not-for-profit foundation formed to raise funds to further support the operations of GH and affiliated exempt entities. Good Samaritan Health Services Foundation (GSHSF) GSH is the Sole member of GSHSF June 1985 A not-for-profit foundation formed to raise funds to further support the operations of GSH and affiliated exempt entities. York Health Foundation (YHF) Sole member March 2000 A not-for-profit foundation formed to raise funds to further support the operations of YH and affiliated exempt entities

13 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Consolidated Other not-forprofit organizations engaged in health services Apple Hill Surgical Center, Inc. (AHSCI) WHCS is the sole member of AHSCI May 1987 A not-for-profit corporation that serves as general partner of AHSCP. Good Samaritan Physician Services (GSPS) GSHSF is the Sole member of GSPS June 1999 A not-for-profit corporation that operates medical practices. This entity was acquired effective July 1, Good Samaritan Real Estate, Inc. (GSRE) GSH is the sole member of GSRE December 1986 A not-for-profit corporation that leases non-residential real estate to exempt affiliates. This entity was acquired effective July 1, Healthy Community Pharmacy, Inc. (HCP) WHCS is the sole member of HCP December 2003 A not-for-profit corporation that dispenses pharmaceuticals to the uninsured population (ceased operations October 31, 2015). Northern Lancaster County Medical Group (NLCMG) ECH is the sole member of NLCMG July 2005 A not-for-profit corporation that operates medical practices. Physician Specialists of NLCMG is the sole June 2011 Northern Lancaster County member of PSNLCMG Medical Group (PSNLCMG) A not-for-profit corporation that operates medical practices. VNA Community Services (VNACS) (Inactive) WSS is the sole member of VNACS August 1984 A not-for-profit corporation that provides home personal care services. VNA Home Health Services (VNAHHS) WSS is the sole member of VNAHHS February 1911 A not-for-profit corporation that provides home health services

14 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Consolidated Other not-forprofit organizations engaged in health services (continued) WellSpan Health Care Services Sole member January 1986 A not-for-profit corporation that (WHCS) engages in health-related activities in the service area. WellSpan Medical Group (WMG) Sole member June 1993 A not-for-profit corporation that operates medical practices. WellSpan Properties, Inc. (WP) WHCS is the sole member of WP April 1987 A not-for-profit corporation that developed the ancillary centers and other outpatient facilities that are leased to affiliates of WellSpan Health. Taxable corporations engaged in taxable activities that support WSH s mission Apple Hill Condominium Association (AHCA) WP and AHSCP own 55.0% and 15.0% interest in AHCA, respectively March 1988 A homeowners association that oversees the Apple Hill Medical Center building. Apple Hill Surgical Center Partners (AHSCP) WSH has 66.4% ownership in the partnership units February 1988 A limited partnership that operates a surgical center. Cherry Tree Cancer Center (CTCC) WHCS has a 50% partnership interest in CTCC April 1997 A limited liability partnership that operates a radiation therapy center

15 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Taxable corporations engaged in taxable activities that support WSH s mission (continued) Ephrata Health Pavilion Condominium Association (EHPCA) ECH has an 83% ownership interest in EHPCA October 2015 A homeowners association that oversees the Ephrata Health Pavilion. EHCPA had no accounting transactions through June 30, GSH Home Med Care, Inc. (GSHMC) GSS owns 100% of March 1977 GSHMC s outstanding stock A corporation that leases and sells medical equipment. This entity was acquired effective July 1, GSH Realty, Inc. (GSR) GSS owns 100% of GSR s outstanding stock December 1986 A corporation that leases real estate to affiliates. This entity was acquired effective July 1, GSH Services, Inc. (GSS) GSHSF owns 100% of GSS s outstanding stock July 1985 A corporation that provides accounting and management services for two subsidiaries (GSHMC and GSR). This entity was acquired effective July 1, Littlestown Health Care Partnership (LHCP) WHCS has a 50% interest in LHCP September 1996 A Pennsylvania partnership that leases outpatient medical facilities. WellSpan Pharmacy, Inc. (WRx) WHCS owns 100% of WRx s outstanding stock April 1985 A corporation that dispenses pharmaceuticals and provides intravenous therapy services. WellSpan Provider Network (WPN) Sole member February 1997 A not-for-profit corporation that coordinates managed care risk contracting and care management activities within WSH. WPN had no accounting transactions through June 30,

16 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Taxable corporations engaged in taxable activities that support WSH s mission (continued) WellSpan Reciprocal Risk Retention Group (WRRRG) Sole member June 2003 A risk retention group that provides coverage for the primary layer of professional and general liability, beginning July 1, York Health Plan d/b/a WellSpan Population Health Services (WPHS) Sole member November 1991 A not-for-profit corporation that administers a preferred provider organization. Other joint ventures accounted for on the equity method Advanced Management Services, LLC (AMS) Philhaven has a % interest 2012 An LLC Partnership operating as a software company. AllSpire Health Group Purchasing Organization, LLC (AHGPO) WSH has a 16.66% interest in AHGPO June 2016 A Delaware LLC Group Purchasing Organization that promotes quality health care and assists providers in efficiently managing expenses. AllSpire Health Partners, LLC (AHP) WSH has a 14.29% interest in AHP. Effective July 1, 2016 WSH has a 20% interest in AHP. July 2013 A limited liability company that operates to advance the charitable, community development, scientific, and educational purposes of its members. Central Pennsylvania Alliance Laboratory (CPAL) 30% membership interest March 1997 A limited liability corporation that operates a regional reference laboratory

17 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Other joint ventures accounts for on the equity method (continued) Central Pennsylvania Healthcare Alliance (CPHA) 30% membership interest in CPHA March 1997 A not-for-profit corporation that provides the infrastructure for overseeing the joint operation of health services in Central Pennsylvania. Downtown Renaissance Fund, LLC (DRF) WSH has a 33.33% interest in DFR December 2009 A limited liability company that operates to advance the charitable, community development, scientific, and educational purposes of its members. Ephrata Medical Office Condominium Association (EMOCA) ECH has a 33.47% interest in EMOCA September 1988 A corporation that oversees a medical office building in Ephrata, PA. Good Samaritan Physician Hospital Organization (GSPHO) GSH has a 50% interest in GSPHO March 1995 A not-for-profit corporation that educates and provides a health network for managed care. KE, LLC (KE) Philhaven is a 50% partner in KE January 2007 An LLC partnership that leases non-residential properties. Northern Lancaster County Medical Transport Services Cooperative (NLCMTS) ECH has a 33.33% interest in NLCMTS November 1996 A PA non-profit cooperative corporation formed to improve the availability and quality of medical transportation services in the communities served by the member organizations. Ceased operations in March Northern Lancaster County Physician Alliance (NLCPA) ECH has a 50% interest in NLCPA July 1986 A not-for-profit corporation that educates and provides a health network for managed care

18 1. Organization (continued) Entity WSH Relation to Entity Date Entity Was Formed Purpose of Entity Other joint ventures accounts for on the equity method (continued) Quest Behavioral Health, Inc. (QUEST) 30% membership interest in QUEST March 1997 A not-for-profit corporation that provides behavioral health managed care services. The Rehab Center (ERC) ECH has a 51% interest in ERC June 1992 A limited partnership that operates a rehab center. Other joint ventures accounted for at cost Cassatt Insurance Company, Ltd (CA) ECH has 3.59% interest in CA June 1991 A risk retention group that provides coverage for the primary layer of professional and general liability, beginning July 1, Community Hospital Alternative for Risk Transfer (CHART) GSH has a 6.55% interest in CHART A risk retention group that provides coverage for the primary layer of professional and general liability. Effective January 1, 2016 WSH filed to withdraw from CHART. Certain board members of YH, GH, ECH, GSH, WPH, WPHS, WMG, WHCS, and WSS also serve as board members of WSH. 2. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of WSH and its sole member corporations and equity investments, with the exception of the joint ventures where WSH has less than 50% control or does not exercise meaningful control. Joint ventures where WSH has 50% control or more and total management responsibilities are included in the consolidated financial statements. All significant intercompany transactions have been eliminated

19 2. Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments Financial instruments consist of cash equivalents, patient accounts receivable, investments and assets limited as to use, notes receivable, accounts payable and accrued expenses, interest rate swap agreements, and long-term debt. The carrying amounts reported on the consolidated balance sheets for financial instruments (except investments in certain limited partnerships and long-term debt) approximate fair value. As prescribed by GAAP, long-term debt is carried at historical cost and investments in limited partnerships are carried at fair value or at cost depending upon the extent of WSH s influence and control. Cash and Cash Equivalents Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. The carrying amount approximates fair value because of the short maturity of these instruments. Cash balances are principally uninsured and are subject to normal credit risks. At June 30, 2016 and 2015, and at various times during the year, WSH maintained cash-in-bank balances in excess of the $250 general deposit federally insured limits. Net Patient Accounts Receivable Net patient accounts receivable and net patient service revenue, less the provision for bad debts, are recorded at estimated amounts expected to be collected. These estimated amounts are subject to further adjustments upon review by third-party payors

20 2. Significant Accounting Policies (continued) The provision for bad debts is based upon management s assessment of historical and expected net collections considering historical business and economic conditions, trends in health care coverage, and other collection indicators. Periodically throughout the year, management assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off experience of self-pay accounts receivable, including those balances after insurance payments and not covered by insurance. The results of this review are then used to make any modifications to the provision for bad debts to establish an appropriate allowance for uncollectible accounts. There have been no significant changes in the current year to the underlying assumptions used by WSH to estimate the allowance for uncollectible accounts. After satisfaction of amounts due from insurance and reasonable efforts to collect from the patients themselves have been exhausted, WSH may place certain past-due patient balances with collection agencies, subject to the terms of certain restrictions on collection efforts as determined by WSH. Patient accounts receivable are written off after collection efforts have been followed in accordance with WSH policies. Overall, after considering acquisitions, the total write-offs of uncollectible accounts and allowances on self-pay patient accounts have not changed significantly since June 30, Assets Limited as to Use and Investments Assets limited as to use primarily include assets held by trustee under bond indenture agreements, self-insurance trust, and designated assets set aside by the Board of Directors. Investment income from these assets is available for current operations of WSH. Certain bond indentures require funds to be deposited with a trustee for future debt service requirements. The assets have been classified as current or long-term to match the designation of the obligation they are intended to satisfy. Investments in debt and equity securities, mutual funds, and money market funds, with readily determinable fair values are measured at fair value based on quoted market prices. WSH also has investments in limited partnerships (LPs) as a conduit for investing that are not actively traded, for which the ownership interest is less than 5% and are recorded on the cost basis. For investments in limited partnerships which the ownership interest exceeds 5%, WSH applies the fair value option (FVO) when an investment converts from cost to the FVO, WSH records the difference between fair value and cost on the consolidated statement of operations at the time this decision is made

21 2. Significant Accounting Policies (continued) WSH s board-designated and other unrestricted investments are designated as a trading portfolio in accordance with the American Institute of Certified Public Accountants Audit and Accounting Guide, Health Care Entities (the Guide). The Guide requires that changes in unrealized gains and losses on marketable securities designated as trading be reported within excess of revenues over expenses. Investment income, realized gains and losses, unrealized gains and losses on trading securities, and other-than-temporary losses on investment transactions (for other-than-trading securities) are included in the excess of revenues over expenses, unless the income or loss is restricted by donor or law. Realized gains and losses for all investments sold are determined on a specificidentification basis. Unrealized gains and losses on other-than-trading investments and assets limited as to use are excluded from the excess of revenues over expenses, and are included as a component of other changes in unrestricted net assets, to the extent that such losses are considered temporary. Investments designated as other-than-trading are periodically reviewed for impairment conditions, including the magnitude and duration of the decline that indicate the occurrence of an other-than-temporary decline. If such conditions exist, the investment s cost is then written down to its current market value. WSH did not identify the occurrence of otherthan-temporary declines in fair value for the years ended June 30, 2016 and Donated securities are recorded at their fair market value. Investment securities and limited partnerships, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risks. Due to the level of risks associated with certain investment securities and limited partnerships, it is reasonably possible that changes in the value of investments could occur in the short-term and that such changes could materially affect the amounts reported in the accompanying consolidated financial statements

22 2. Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and are composed of the following: June Pharmaceutical drugs $ 8,649 $ 8,020 Medical supplies 13,137 9,328 Computer supplies $ 21,928 $ 17,437 Property and Equipment Property and equipment acquisitions are recorded at cost. Net interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. Capitalized net interest for the years ended June 30, 2016 and 2015, was $5,132 and $1,383, respectively. Expenditures for renewals and improvements are charged to the property accounts. Replacements, maintenance, and repairs that do not improve or extend the life of the respective assets are expensed when incurred. WSH removes the cost and the related accumulated depreciation from the accounts for assets sold or retired, and resulting gains or losses are included on the accompanying consolidated statements of operations. Donated assets are recorded at their fair value at the date of donation. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service

23 2. Significant Accounting Policies (continued) Depreciation and amortization is provided over the estimated useful life of each class of depreciable asset and is computed by the straight-line method. Equipment under capital leases is amortized on a straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated financial statements. Deferred Financing Costs Financing costs incurred in connection with long-term financing have been deferred and are being amortized on a straight-line basis over the life of the related debt. Self-Insurance Costs The provision for estimated medical malpractice, workers compensation, and employee health claims includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. Derivative Financial Instruments The interest rate swap agreements are used by WSH to manage interest rate exposures and to hedge the changes in cash flows on variable rate revenue bonds. These types of derivative financial instruments involve, to a varying degree, elements of market and credit risk. The market risk associated with these instruments resulting from interest rate movements is expected to offset the market risk of the liability being hedged. WSH recognizes the interest rate swap agreements on the consolidated balance sheets at fair value. Management has determined that WSH s interest rate swap agreements do not qualify as hedges for financial reporting purposes. Consequently, the changes in the fair value of WSH s interest rate swap agreements are included as a component of excess of revenues over expenses on the consolidated statements of operations

24 2. Significant Accounting Policies (continued) Temporarily and Permanently Restricted Investments and Net Assets Unconditional promises to give cash and other assets are reported at fair value at the date the promise is received. The gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose for the restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported on the consolidated statements of operations as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reported as unrestricted contributions in the accompanying consolidated financial statements. Permanently restricted net assets represent WSH s beneficial interest in perpetual trusts recorded at fair value. Beneficial interests in perpetual trusts are reported at fair value, with WSH s share determined by its interest percentage in the trust. Annual changes in fair value are reported as increases or decreases in permanently restricted net assets. Endowments WSH s endowments consist of individual funds established for specific purposes and consist solely of donor-restricted endowment funds. As required by U.S. generally accepted accounting principles, net assets associated with endowment funds are classified and reported based on existence or absence of donor-imposed restrictions. WSH classifies as permanently restricted net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment, and (3) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is characterized as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization. WSH considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: The duration and preservation of the fund The purposes of WSH and the donor-restricted endowment fund

25 2. Significant Accounting Policies (continued) General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of WSH The investment policies of WSH WSH has adopted investment policies for its endowment assets that are consistent with the policies and objectives of its overall investments. The assets are invested in a manner that is intended to produce a positive rate of return while assuming a low level of risk. From time to time, the fair value of assets associated with the donor-restricted endowment funds may fall below the level that the donor requires WSH to maintain in perpetual duration. Deficiencies of this nature are reported in unrestricted net assets in accordance with U.S. generally accepted accounting principles. Excess of Revenues Over Expenses The consolidated statements of operations include the excess of revenues over expenses. Changes in unrestricted net assets that are excluded from the excess of revenues over expenses, consistent with industry practice, include unrealized gains and losses on other-than-trading assets limited as to use and investments to the extent losses are deemed temporary, contributions of long-lived assets (including assets acquired using contributions which by donor restriction were to be used for the purposes of acquiring such assets) and changes in accrued retirement benefits. Electronic Health Record Incentive Program The Centers for Medicare and Medicaid Services (CMS) have implemented provisions for the American Recovery and Reinvestment Act of 2009 that provide incentive payments for the meaningful use of certified electronic health record (EHR) technology. CMS has defined meaningful use as meeting certain objectives and clinical quality measures based on current and updated technology capabilities over predetermined reporting periods as established by CMS. The Medicare EHR incentive program provides annual incentive payments to eligible

26 2. Significant Accounting Policies (continued) professionals and hospitals that demonstrate meaningful use of certified EHR technology. The Medicaid EHR incentive program provides annual incentive payments to eligible professionals and hospitals that adopt, implement, and meaningfully use certified EHR technology. WSH utilizes a grant accounting model to recognize EHR incentive revenues. WSH records EHR incentive revenue ratably throughout the incentive reporting period when WSH is reasonably assured that it will meet the meaningful use objectives for the required reporting period and the grants will be received. During the fiscal year ended June 30, 2016, the hospitals successfully attested to year one of stage two for both the Medicare and Medicaid incentive program, as applicable, using a 90-day reporting period. The total incentive dollars received for the hospital based incentive from Medicare and Medicaid was $4,734 and $375, respectively. The EHR reporting periods for the eligible providers runs from January 1 to December 31. Accordingly, for the years ended June 30, 2016 and 2015, WSH recorded EHR incentive revenues related to eligible providers of $1,706 and $2,613, respectively. For the year ended June 30, 2016, the eligible provider EHR incentive revenues are composed of $1,039 of Medicare revenues and $671 of Medicaid revenues; for the year ended June 30, 2015, the EHR incentive revenues are comprised of $1,846 of Medicare revenues and $767 of Medicaid revenues. All EHR incentive revenues are included in other revenue on the accompanying consolidated statements of operations. There were no EHR incentive receivables recorded in other receivables at June 30, 2016 and Other Revenue Other revenue for the years ended June 30, 2016 and 2015, consists primarily of WRx s prescription sales of $39,670 and $36,553, respectively. Investment income from assets limited as to use under bond indenture agreements, cafeteria sales, grant revenues, EHR incentive revenues, and other non-patient service revenue are also included in other revenue. Charity Care For patients who meet certain criteria under its charity care policy, WSH provides care without charge or at amounts less than its established rates. Because WSH does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue

27 2. Significant Accounting Policies (continued) Federal and State Income Taxes WSH, the six hospitals (ECH, GH, GSH, WPH, WSS, and YH), the four foundations (ECHF, GHF, GSHSF, and YHF), and the ten other not-for-profits engaged in health services (AHSCI, GSPS, HCP, NLCMG, PSNLCMG, VNACS, VNAHHS, WHCS, WMG, and WP) are taxexempt organizations under Section 501(c)(3), and GSRE is tax-exempt under 501(c)(2), of the Internal Revenue Code. Therefore, these entities will not incur any liability for federal income tax, except for possible unrelated business income. WRx, GSS, GSHMC, GSR, AHCA, WPHS, and WPN are subject to federal and state income taxes. The estimated taxes for the taxable income are not significant and are provided for on the consolidated statements of operations. At June 30, 2016, it was more than likely that WSH taxable entities, net operating loss (NOL) carryovers would be utilized before expiring. The net deferred tax asset as of June 30, 2016, was $3,851. No federal or state income taxes have been provided for AHSCP, CTCC, and LHCP, in the accompanying consolidated financial statements, as they are not payable by these entities. The partners are to include their respective share of these entities profits or losses in their individual tax returns. WRRRG is a reciprocal risk retention group formed under the federal Liability Risk Retention Act of WRRRG qualifies as an insurance company for federal income tax purposes. WRRRG is domiciled in Vermont (VT), and operates within the states of Pennsylvania (PA) and Maryland (MD). VT, PA, MD do not impose a corporate income tax on insurance companies. WSH follows the accounting guidance for uncertainties in income tax positions which requires that a tax position be recognized or derecognized based on a more likely than not threshold. This applies to positions taken or expected to be taken in a tax return. WSH does not believe its consolidated financial statements include any material uncertain tax positions. Management believes that WSH and its subsidiaries are no longer subject to income tax examinations for years prior to

28 2. Significant Accounting Policies (continued) Good Samaritan Hospital Acquisition On July 1, 2015 (the GSH Acquisition Date), WSH acquired GSH, GSHSF, GSPS, GSRE, GSR, GSHMC, GSS and GSPHO, which is composed of a 189-bed, acute care hospital, two real estate companies, physician practice organization, durable medical equipment company, foundation, and a physician hospital alliance located in and around Lebanon, Pennsylvania. WSH acquired by means of an inherent contribution where no consideration was transferred by WSH. WSH accounted for this business combination by applying the acquisition method and, accordingly, the inherent contribution received was valued as the excess of assets acquired over liabilities assumed. In determining the inherent contribution received, all assets acquired and liabilities assumed were measured at fair value as of the GSH Acquisition Date. The results of the operations have been included in the consolidating financial statements since the GSH Acquisition Date

29 2. Significant Accounting Policies (continued) The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the GSH Acquisition Date, July 1, 2015: Assets Cash and cash equivalents $ 2,885 Patent accounts receivable, net of allowance for uncollectible accounts 24,373 Other receivable 1,739 Inventories 1,934 Prepaid expenses 3,580 Board-designed investments 29,438 Pledge receivables 2,083 Property and equipment, net 92,282 Investments in joint ventures 5,853 Other assets 19,204 Total assets acquired $ 183,371 Liabilities Accounts payable and accrued expenses $ 25,072 Accrued salaries and wages 8,803 Third-party payor settlements 3,591 Accrued retirement benefits 43,016 Professional and general liability reserves 5,147 Long-term debt 67,767 Total liabilities assumed 153,396 Excess of assets acquired over liabilities assumed $ 29,975 Net assets acquired Unrestricted $ 23,105 Temporary restricted 6,182 Permanently restricted 688 Excess of assets acquired over liabilities assumed $ 29,

30 2. Significant Accounting Policies (continued) Other assets include the following intangible assets: Fair Value as of Acquisition Date Estimated Life Medical records $ 3, years Trade name 3, years $ 6,672 The following table summarizes amounts attributable to GSH, GSHSF, GSPS, GSRE, GSR, GSHMC, GSS and GSPHO since the GSH Acquisition Date, period from July 1, 2015 to June 30, 2016, that are included in the accompanying consolidated financial statements: Total operating revenue $ 209,988 Total operating expenses 225,860 Deficiency of operating revenue over operating expenses (15,872) Total non-operating gains and losses 1,009 Deficiency of revenue and gains and losses over expenses $ (14,863) Change in net assets: Unrestricted net assets $ (14,863) Temporarily restricted net assets 569 Permanently restricted net assets 28 Total change in net assets $ (14,266)

31 2. Significant Accounting Policies (continued) WellSpan Philhaven Hospital Acquisition On January 1, 2016 (the WPH Acquisition Date), WSH acquired WPH a mental and behavioral health inpatient and outpatient provider located in and around Lebanon, Pennsylvania. WSH agreed to contribute a total of $7,260 to the Lancaster Mennonite Conference to create an unrelated charitable foundation. WSH acquired by means of an inherent contribution where no other consideration was transferred by WSH. WSH accounted for this business combination by applying the acquisition method and, accordingly, the inherent contribution received was valued as the excess of assets acquired over liabilities assumed. In determining the inherent contribution received, all assets acquired and liabilities assumed were measured at fair value as of the WPH Acquisition Date. The results of the operations have been included in the consolidating financial statements since the WPH Acquisition Date

32 2. Significant Accounting Policies (continued) The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the WPH Acquisition Date, January 1, 2016: Assets Patent accounts receivable, net of allowance for uncollectible accounts $ 11,633 Other receivable 2,436 Inventories 11 Prepaid expenses 1,297 Board-designed investments 6,368 Pledge receivables 349 Note receivable 340 Property and equipment, net 30,775 Investments in joint ventures 890 Deferred financing cost 3 Other assets 3,197 Total assets acquired $ 57,299 Liabilities Accounts payable and accrued expenses $ 8,437 Accrued salaries and wages 3,634 Advances from third-party payors 46 Accrued retirement benefits 13 Professional and general liability reserves 1,197 Long-term debt 7,417 Total liabilities assumed 20,744 Excess of assets acquired over liabilities assumed $ 36,555 Net assets acquired Unrestricted $ 35,253 Temporary restricted 706 Permanently restricted 596 Excess of assets acquired over liabilities assumed $ 36,

33 2. Significant Accounting Policies (continued) Other assets include the following intangible assets: Fair Value as of Acquisition Date Estimated Life Medical records $ years Trade name 2, years $ 3,197 The following table summarizes amounts attributable to WPH since the WPH Acquisition Date, period from January 1, 2016 to June 30, 2016, that are included in the accompanying consolidated financial statements: Total operating revenue $ 32,251 Total operating expenses 32,382 Deficiency of operating revenue over operating expenses (131) Total non-operating gains and losses 274 Deficiency of revenue and gains and losses over expenses $ 143 Change in net assets: Unrestricted net assets $ 143 Temporarily restricted net assets (95) Permanently restricted net assets (7) Total change in net assets $

34 2. Significant Accounting Policies (continued) The following table represents unaudited pro forma financial information, assuming the acquisition of WPH had taken place July 1, The pro forma information includes adjustments for amortization of intangible assets. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the WPH Acquisition Date. Year Ended June Total operating revenue $ 1,997,640 $ 1,876,727 Total operating expenses 1,921,682 1,782,085 Excess of operating revenue over operating expenses 75,958 94,642 Total non-operating gains and losses 33,494 4,061 Excess of revenue and gains and losses over expenses $ 109,452 $ 98,703 Change in net assets: Unrestricted net assets $ 100,820 $ 6,062 Temporarily restricted net assets 5, Permanently restricted net assets 1,224 (272) Total change in net assets $ 107,882 $ 6,491 New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers (Topic 606), to clarify revenue recognition principles. This guidance is intended to improve disclosure requirements and enhance the comparability of revenue recognition practices. Improved disclosures under the amended guidance relate to the nature, amount, timing, and uncertainty of revenue that is recognized from contracts with customers (payors). This guidance will be effective for reporting periods beginning after December 15, 2017 and will be required to be applied retrospectively. WSH is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements